Mana’s Mid Year Market Recap
On June 4, 2020, LPL reported that the S&P 500 was up the most it has ever been over any 50-day period. While years following sharp market declines have often had strong stock market performance, the headline economic data did not paint a picture that a reversal would be so strong or swift. After the losses suffered during March, the predictions of the recovery from economists and banks were all over the charts, including nomenclatures like V shaped, U shaped, W shaped, J shaped and L shaped recoveries… frankly, too much alphabet soup.
This is why most professional investors will (or should!) tell you not to try to time the market. The bottom is hard to gauge. Oftentimes the best days in the market follow the worst days. And once the market starts going up, it’s nearly impossible to predict the momentum of a full recovery.
What happened in the last quarter?
GDP in the US decreased by 32% - the worst drop we’ve seen in recorded history over the past two centuries, including both the Great Depression and the Great Recession Consumer spending makes up almost 70% of GDP in the US, so consumer trends are important. Understanding the dynamics of consumer demand has been a challenge using traditional metrics in this environment, so many economics are turning to high frequency data (data used by hedge funds) to analyze consumer behavior. Based on the year-over-year statistics, US seated diners (i.e. people eating at restaurants) is down 65%, TSA traveler traffic down 79%, global flights down 30% and hotel occupancy down 42%. Meanwhile, driving direction usage is up 36% and mortgage applications up 15%. Since not all numbers are negative, this points to a shift in consumer demand, rather than an absolute halt. It’s clear that some people still have money - they are just choosing to spend it on driving vacations and home purchases (and boats, and RVs) instead of traditional destination travel.
Meanwhile, US unemployment reached 14% in April, the highest rate since the Great Depression. While federal stimulus, including the Paycheck Protection Program (“PPP”), a package that offered forgivable loans to employers who maintained their staff, may have helped these numbers, the future remains uncertain for many small businesses. S&P Global provided alarming statistics that only 1 of 3 businesses who applied for the PPP received it; and that according to a survey by Main Street America, nearly 7.5 million small businesses may be forced to close over the next five months, with 3.5 million more at risk of closure in the next two months. As the proceeds ran dry at the end of July, further fiscal stimulus is needed to reboot the economy. With Presidential elections on the horizon and a Congress that is more than willing to pull out their checkbooks, our expectation is an additional package of $1-1.5 trillion will be passed by mid-August. However, the longer it takes Congress to approve payments - specifically to the poorest and most vulnerable - the more likely our V shaped recovery will turn into a U, W or L. The debates are around whether or not unemployment incentivizes individuals not to work. While this certainly could be true for some individuals (where unemployment benefits exceeded their traditional wages) for many people unemployment is occurring in industries that are suffering and are unlikely to return to normal until a COVID vaccine is here. We hope that we see progress made this week - our US economic future depends on it.
How has the US economy and stock market been compared to other countries?
While in more recent history, US stocks have outperformed international stocks, the coming months and how the US handles the continued spread of COVID-19 as well as financial stimulus will be telling of our path forward. Globally we have seen a slowdown in trade and mobility, but many countries have returned to more of a normal environment. As an example, China reported GDP gains of 3.2% during Q2 2020. With countries more insulated due to travel bans and supply chains becoming more fragmented due to trade discussions, we could absolutely see a world where divergence in stock market performance between countries is quite high in the years to come. Examples like this are why we believe in portfolio diversification - some investments should zig while others zag.
How will the election impact the stock market?
Locally, we know investors will be focused on the upcoming US Presidential elections, which are less than three months away. In elections past, there has always been dialogue in the news regarding stock market performance and the impact a Democrat or Republican would have on the ability for stocks to rise. We like going back to the data - so we want to clear the air that if we go back to 1929, the US stock market (defined by the S&P 500) has been positive and negative during both Democatic and Republican Presidents. However, while Republicans are typically known for their pro-business policies, which is often believed to drive stock market performance, on average the S&P 500 has actually done better under Democratic regimes.
If you’re looking for a stronger indicator, Schwab points out that the performance of the S&P 500 prior to an election has some predictive power. “When the S&P 500 has risen in the three months before an election, the incumbent party generally has gone on to win the White House; when it has fallen, the incumbent party has generally lost. Since 1928, this trend has been broken just three times - an 87% success rate - and it hasn’t missed since 1980.”
S&P 500 Total Return by President since 1929
So where do we go from here?
Based on history, the stock market returns 10% per year, but on an annual basis have ranged anywhere from -43% to +54% and over the past 94 years, only 10% of the time does the market return between 8-12%. In order to earn an average return, the best thing to do is to stay invested.
We’ve witnessed increased temptation to invest in the stocks that have recently outperformed - namely, US large cap technology. While we believe in the continued growth of this asset class, an important part of the work we do is to advise clients not to put all eggs in one basket. The rise of online brokers like Robinhood make it easy to place big bets on individual stocks and sectors, but investors should remember that investing is not gambling.
Andrew Sheets, Morgan Stanley’s Chief Cross Asset Strategist, said it well on the Bloomberg Surveillance Podcast: “Stocks are at 21x forward earnings but the economy is still very weak… There has rarely been a more extreme gap between what the market is paying for what it considers the best highest quality companies vs. what it is paying for the rest.” We know from our experience in the financial markets that reversion to the mean can be a powerful force and that many times the biggest risks in a portfolio are the ones you don’t see. We also know that the market accounts for 15+ years of future growth expectations, so while things may seem crazy now, it doesn’t mean that the markets will directly correlate to what’s happening in the economy. If you’re either currently invested and worried about your portfolio or you have the majority of your net worth in cash and are too afraid to invest, we recommend consulting with a fiduciary financial advisor to determine what plan of action is best for you.
Stephanie Bucko and Cristina Livadary are fee-only financial planners based in Los Angeles, California. Stephanie is the Chief Investment Officer and Cristina is the Chief Executive Officer at Mana Financial Life Design (FLD). Mana FLD provides comprehensive financial planning and investment management services to help clients grow and protect their wealth throughout life’s journey. Mana FLD specializes in advising ambitious professionals who seek financial knowledge and want to implement creative budgeting, savings, proactive planning and powerful investment strategies. As fee-only fiduciaries and independent financial advisors, Stephanie and Cristina never receive commission of any kind. Stephanie and Cristina are legally bound by their certifications to provide unbiased and trustworthy financial advice.